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What Is An Independent Contractor

When looking at work from home opportunities you will eventually come across the term “independent contractor”. If you have always worked for other people or for a company then it is important that you understand what this term means.

An independent contractor is basically a business owner or “self-employed”. When a customer makes a request, you decide how and when to do the work.In other words, you work for yourself.

There are many advantages to being an independent contractor and also some disadvantages. Before people agree to this style of service, they should research the differences between employees and independent contractors and the financial benefits and consequences of operating their own business.

An Employee

Employees are paid a fee for their work and may receive benefits like vacations, holiday pay and sick leave. Other advantages include unemployment insurance and Worker’s Compensation. When an employee works, he or she is guaranteed a paycheck. Taxes are withheld from income and paid to the government agencies. Employers determine when the employee will work and what each person will do.

An Independent Contractor

As a business owner, the independent contractor has no benefits, no unemployment insurance and no Worker’s Compensation. Usually, this person is paid when the job is completed; if he or she does not get paid, the business owner may have to sue the client for the money. Because no taxes are withheld, business owners must file quarterly tax returns and pay self employment insurance on the profits.

Business operators set their own schedule and determine how they will do the work. If they need help, they can hire someone to assist them. These people can work for more than one company at a time but must handle all of the functions themselves and keep track of expenses and revenue.

The Advantages of Being Self-Employed

Probably the biggest advantage of being an independent contractor is control over your own schedule. There is no time clock to punch and no set work hours. When you operate your own business, you can deduct certain business expenses. If you work from home and meet the IRS guidelines, they may be able to deduct a portion of the utilities, insurance, repairs and improvements made to the house. Deductions may include a portion of the rent or mortgage payment and real estate taxes. However, unless you are running a full business out of your home these types of deductions won’t apply to most work from home moms.

However, regular business expenses like travel, office equipment, supplies and telephone are legitimate expenses for most freelancers. Although these individuals have to pay taxes on their income, they only pay taxes on their profits. All of these expenses are deducted from the gross amount earned. It is always advised that you consult an accountant to understand what are or are not legitimate expenses.

The Disadvantages of Being Self-Employed

Because independent contractors are self-employed, they may not make a profit, have no job security and no guaranteed source of income. Once the contract has been fulfilled, these small business owners must find someone else who needs their services. These operators are personally liable for business debt. If supplies are ordered for a job and the job is canceled without payment, independent contractors are responsible for the cost of supplies.

Beyond the unpredictability of income, an independent contractor has to pay a self-employment tax which covers a portion of taxes usually covered by an employer. Many new to freelancing are surprised by their final net pay after taxes and expenses. And in general, tax filing becomes more cumbersome for anyone that works from home as an independent contractor because of the additional forms and quarterly payments that are required..

Since most work from home jobs entail being an independent contractor, be sure you investigate the tax implications of the situation so that you are prepared. Be sure to read through the information at IRS.gov including the self-employed tax center page which will help you understand how to handle taxes when you are self-employed.